Local Government bond creditworthiness
Japanese Local Governments are authorized to levy their own taxes. This taxing authority serves as collateral for the principal and interest payments of Local Government Bonds.
At the macro level, the Local Public Finance Program estimated Local Government Bond servicing costs. The Program is prepared annually by the Ministry of Internal Affairs and Communications (MIC) and the Ministry of Finance (MoF) and submitted to the Diet for approval. Those servicing payments are included in the calculation of local allocation tax, and this effectively ensures revenue sources for debt repayment for every local government.
A local finance rehabilitation system has been developed to assist localities in danger of bankruptcy. Under the system, the national government directly oversees financial management, including budgeting, of Local Governments when those governments' deficits exceed a specified level.
Local Governments that are under direct national supervision may not issue bonds, except bonds expressly allowed in the financial rehabilitation plan and approved by the Ministry of Internal Affairs and Communications(the Law on Special Measures to Promote Local Finance Rehabilitation).
Restrictions on borrowing are also imposed by Local Governments in the following cases:
- Local Governments with a high debt service ratio ( the ratio of debt service expenses as percentage of general financial resources); and
- Local Governments levying an ordinary tax at a rate lower than a statutory standard rate (the Local Finance Law).
Safety of Japanese LGB
- There are strong financial support system and check system for LGs by NG (National Government).
- The bankruptcy of LGs(Local Governments) and debt discharge of LGB is NOT allowed under current Japanese system.
- Therefore, payment failure has NOT happened up to now.
- From these facts, Japanese financial authority assigned 0 % riskweight to LGB in the standardized approach of BIS regulations (Basel II).